The Alternative Investment Fund Managers Directive (AIFMD), effective July 22 2013, will have a major industry impact in the European Union, but a careful approach can limit disruption.
This is one of the underlying messages in Deutsche Bank’s new white paper on AIFMD, “Charting a smooth course through AIFMD implementation”.
Against a backdrop of ongoing regulation, AIFMD seeks to increase investor confidence. Although some of the practicalities of the directive are still in a state of flux, the fundamentals will not change and will affect every player in the alternative investment funds space in Europe.
AIFMD puts alternative fund managers under an unprecedented degree of regulatory scrutiny. It also increases the breadth and importance of the depositary’s role, including the assumption of liability for loss of any financial instruments they hold in custody on behalf of the alternative investment fund.
The new dynamics created by AIFMD are making some fund managers uneasy, however, but the key will be in adopting an operating model that complies with the directive while minimizing disruption to existing roles and relationships. An integrated model is one way of achieving this, with fund managers consolidating their business with depositaries equipped to work with their existing prime brokers.
The depositary’s expanded role means they will need to upgrade their existing capabilities, notably around due diligence, cash monitoring and liability.
The integrated model, possibly comprising depositary services, administration, cash management, corporate administration, sub custody and - potentially - a prime broker, has several advantages, not least that it leverages the efficiencies and cost-savings from larger, global providers’ domestic networks and capabilities.
Models that split depositary and administration services will most likely incur higher costs, largely due to replication of processes. An integrated model can avoid such duplication and offer benefits such as risk mitigation and greater transparency. Such a model will maximize the opportunities AIFMD will bring.